a simple question

sellrich

Just a quick question. if you put money into a pension all your life and at the age of 65 you then buy an annuity. If then you die at 66 what happens to all that money you have saved all your life for? Is the money lost? If so why would anyone put money into a pension?

dunstonh

If then you die at 66 what happens to all that money you have saved all your life for?

Depends on the annuity you purchase and the options you include. If you want, you can buy 5 year or 10 year guarantees, capital buy back upto age 75. Joint life annuities etc.

If so why would anyone put money into a pension?

It is the most efficient way to provide for an income in retirement. Nothing else conventional beats it as far as income provision is concerned.

EdInvestor

sellrich wrote: »

Just a quick question. if you put money into a pension all your life and at the age of 65 you then buy an annuity. If then you die at 66 what happens to all that money you have saved all your life for? Is the money lost? If so why would anyone put money into a pension?

These days there is an alternative to an annuity known as income drawdown (or unsecured pension). Under a drawdown plan the capital is not lost, it remains invested and you take an income from the fund.If you die before the age of 75 your beneficiaries can take the fund back in cash minus 35% tax ( in lieu of the tax you would pay if you took the income instead). There is no inheritance tax to pay.

The position is still bad after the age of 75, as the Government is trying to stop people from using pensions as a method of tax free life cover and avoiding inheritance tax.

It should bring in a new rule extending the pre-75 drawdown death benefit rules after 75 for those who have been using drawdown to provide a pension all along.

If so why would anyone put money into a pension?

Many people don't understand the pension rules.They have no idea that once money goes into a pension,they can't ever get it out (other than by dying before the age of 75). Nor do they understand about annuities.Here's an example:

http://forums.moneysavingexpert.com/showthread.html?t=1309233

and another

http://forums.moneysavingexpert.com/showthread.html?t=1308783

Of course it's not in the interests of insurance salesmen to draw these things to their attention, as they would likely lose the sale.

If the victim later finds out, they will tend to blame the Government.

Linton

sellrich wrote: »

Just a quick question. if you put money into a pension all your life and at the age of 65 you then buy an annuity. If then you die at 66 what happens to all that money you have saved all your life for? Is the money lost? If so why would anyone put money into a pension?

Because if you live to a 100 you will continue to receive the same income (indexed to inflation if you wish). There is no other way this can be guaranteed

MrMicawber_2

Yes, buying an annuity might not be perfect by any means but you do get a guaranteed income for life (and also for your surviving partner if you select such an option). Those who live only a shortwhile in effect subsidise those who live longer so there's an element of pot luck.

If you don't go the annuity option you could easily find yourself completely running out of money - it depends on whether the capital you have saved plus the annual growth of that capital is eroded (and at what rate) by the income you need to take.

McKneff

hi, i have been told that my pension pot is around £45,000 and i will take my 25% lump sum in October. Is draw down only for pensions where there is a lot more money in the pot than i have.
I suppose i'm saying would i be better with an annuity or drawdown

EdInvestor

anniehanlon wrote: »

hi, i have been told that my pension pot is around £45,000 and i will take my 25% lump sum in October. Is draw down only for pensions where there is a lot more money in the pot than i have.
I suppose i'm saying would i be better with an annuity or drawdown

What other income will you have in retirement? Will your basic costs be covered by an index linked state and/or company pension? Do you own your own home outright?Do you have additional savings?

McKneff

hi ed, I will hve state pension of around £75 per week (not full, but includes some serps.) The only pension i will have is the one in my post. Savings of approx. £30k which is mine and my OH, and yes we own our own home. We have no debts.

My husband will have state pension of around £125 per week, £20 per week private pension (and half of MY £30k:rotfl: savings.
i was planning to maybe stay at work part time, take my company pension and defer my state pension for a year or so.
I have worked since i was 15 years old so need to leave employment in stages!!!

dunstonh

anniehanlon wrote: »

hi, i have been told that my pension pot is around £45,000 and i will take my 25% lump sum in October. Is draw down only for pensions where there is a lot more money in the pot than i have.
I suppose i'm saying would i be better with an annuity or drawdown

You can do drawdown with any value. The FSA takes the view that its best for people with pots over £100k. That said, they wouldnt have issues with advice cases where there is decent justification. e.g. smaller value pot but with other pensions/investments that would be utilised.

Look at it from their point of view. The annuity is guaranteed for life. If this is your only source of personal retirement income, do you really want it to be subject to investment returns?

Its a risk issue really. Can you afford for that retirement income to go down?